UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 33-31706-01
SULLIVAN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
225 High Ridge Road
Stamford, Connecticut 06905
(203) 977-8101
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SULLIVAN GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Sullivan Communications, Inc. has 123,889 shares outstanding of its Common
Stock, $.01 Par Value, as of October 31, 1996 (all of which are privately owned
and not traded on a public market).
Exhibit Index on page 26 of 50 total pages
<PAGE>
INDEX
Part I. Financial Information Page No.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Operations for the 6
six months ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents -- --
Receivables:
Trade accounts, less allowance for doubtful accounts of $6,109 and $4,830
at September 30, 1996 and March 31, 1996,
respectively $ 63,117 64,465
Other 3,588 3,588
-------- -------
Total receivables 66,705 68,053
Inventories 12,755 13,181
Prepaid expenses and other current assets 5,146 4,285
-------- -------
Total current assets 84,606 85,519
Property, plant and equipment 228,415 207,264
Less accumulated depreciation (63,111) (51,103)
-------- -------
Net property, plant and equipment 165,304 156,161
Excess of cost over net assets acquired, less accumulated amortization of
$29,368 and $25,269 at September 30, 1996 and March 31, 1996,
respectively 85,379 89,324
Other assets 18,561 20,177
-------- -------
Total assets $353,850 351,181
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 15,256 11,490
Trade accounts payable 39,068 35,931
Accrued expenses 24,416 27,271
Income taxes 882 1,215
--------- ---------
Total current liabilities 79,622 75,907
Long-term debt and capitalized leases, excluding
current installments 296,113 286,127
Deferred income taxes 8,504 7,801
Other liabilities 29,232 25,742
--------- ---------
Total liabilities 413,471 395,577
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 123,889 shares issued and
outstanding 1 1
Series A convertible preferred stock, $.01 par value,
4,000 shares authorized, issued and outstanding,
$40,000,000 liquidation preference -- --
Series B convertible preferred stock, $.01 par value,
1,750 shares authorized, issued and outstanding,
$17,500,000 liquidation preference -- --
Additional paid-in capital 57,499 57,499
Accumulated deficit (115,677) (100,525)
Cumulative translation adjustment (1,444) (1,371)
--------- ---------
Total stockholders' deficit (59,621) (44,396)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 353,850 351,181
========= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended
September 30,
------------------
1996 1995
---- ----
Sales $ 138,495 130,653
Cost of sales 121,005 113,458
--------- ---------
Gross profit 17,490 17,195
Selling, general and administrative expenses (note 8) 12,850 10,152
Amortization of goodwill 2,050 2,158
Restructuring costs 75 644
--------- ---------
Operating income 2,515 4,241
Other expense (income):
Interest expense 9,464 8,006
Interest income (44) (69)
Other, net 34 878
--------- ---------
Total other expense 9,454 8,815
Loss from operations before income taxes
and extraordinary item (6,939) (4,574)
Income tax expense (609) (371)
--------- ---------
Loss from operations before
extraordinary item (7,548) (4,945)
Loss on early extinguishment of debt, net of
tax -- (4,526)
--------- ---------
Net loss $ (7,548) (9,471)
========= =========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Six Months Ended
September 30,
------------------
1996 1995
---- ----
Sales $ 278,199 255,143
Cost of sales 245,316 221,193
--------- ---------
Gross profit 32,883 33,950
Selling, general and administrative expenses (note 8) 23,899 18,352
Amortization of goodwill 4,099 4,315
Restructuring costs 488 2,724
--------- ---------
Operating income 4,397 8,559
Other expense (income):
Interest expense 18,094 15,219
Interest income (91) (180)
Nonrecurring charge related to terminated
merger -- 1,534
Other, net (45) 1,022
--------- ---------
Total other expense 17,958 17,595
--------- ---------
Loss from operations before income taxes
and extraordinary item (13,561) (9,036)
Income tax expense (1,591) (3,187)
--------- ---------
Loss from operations before
extraordinary item (15,152) (12,223)
Loss on early extinguishment of debt, net of
tax -- (4,526)
--------- ---------
Net loss $ (15,152) (16,749)
========= =========
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net loss $(15,152) (16,749)
Adjustments to reconcile net loss to cash provided (used) by operating
activities:
Depreciation 12,054 10,288
Amortization of goodwill and other assets 4,931 5,052
Amortization of deferred financing costs and bond premium 869 480
-------- --------
17,854 15,820
Extraordinary non-cash credit from early retirement of debt, net -- (1,803)
Decrease (increase) in working capital and other 5,498 (11,827)
-------- --------
Net cash provided (used) by operating activities 8,200 (14,559)
Cash flows provided (used) by investing activities:
Cash purchases of property, plant and equipment (4,981) (13,635)
Proceeds from sales of property, plant and equipment 21 1
Other (80) (137)
-------- --------
Net cash used by investing activities (5,040) (13,771)
Cash flows provided (used) by financing activities:
Proceeds from long-term borrowings -- 245,000
Repayment of long-term debt, including current maturities (4,450) (218,611)
Net increase in revolver borrowings 3,123 9,770
Payments under capital lease obligations (1,278) (124)
Payment of deferred financing costs (555) (11,846)
Other, net -- 121
-------- --------
Net cash (used) provided by financing activities (3,160) 24,310
Effect of exchange rates on cash and cash equivalents -- 10
Decrease in cash and cash equivalents -- (4,010)
-------- --------
Cash and cash equivalents:
Beginning of period -- 4,635
-------- --------
End of period $ -- 625
======== ========
Noncash investing activity:
Equipment purchases under capital leases $ 16,243 1,844
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Description of the Company
Sullivan Communications, Inc. ("Communications"), and, together with its wholly
owned subsidiary, Sullivan Graphics, Inc. ("Graphics"), collectively, (the
"Company") was formed in April 1989 under the name GBP Holdings, Inc. to effect
the purchase of all the capital stock of GBP Industries, Inc. from its
stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings,
Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc.
changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan
Holdings, Inc. changed its name to Sullivan Communications, Inc.
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of
Merger dated as of March 12, 1993, as amended (the "Merger Agreement"), between
Communications and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition
Corp. was merged with and into Communications (the "Acquisition"). Acquisition
Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain
institutional investors and certain members of management (the "Purchasers") for
the purpose of acquiring a majority interest in Communications. Acquisition
Corp. acquired a substantial and controlling majority interest in Communications
in exchange for $40 million in cash. In the Acquisition, Communications
continued as the surviving corporation and the separate corporate existence of
Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the "Shakopee
Merger") with Shakopee Valley Printing Inc. ("Shakopee"). Shakopee was formed to
effect the purchase of certain assets and assumption of certain liabilities of
Shakopee Valley Printing, a division of Guy Gannett Communications. On December
22, 1994, pursuant to an Agreement for the Purchase of Assets between Guy
Gannett Communications (the "Seller") and Shakopee (the "Buyer"), the Seller
agreed to sell (effective at the close of business on December 22, 1994) certain
assets and transfer certain liabilities of Shakopee Valley Printing to the Buyer
for a total purchase price of approximately $42.6 million, primarily financed
through the issuance of 35,000 shares of Common Stock and bank borrowings. The
35,000 shares were purchased by Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group Trust
and Leeway & Co. The general partner of each of the MSCP III Entities is a
wholly owned subsidiary of Morgan Stanley Group Inc., the parent company of the
general partner of the Company's majority stockholder. In addition, the other
stockholders of Shakopee were also stockholders of the Company.
Communications has no operations or significant assets other than its investment
in Graphics. Communications is dependent upon distributions from Graphics to
fund its obligations. Under the terms of its debt agreements at September 30,
1996, Graphics' ability to pay dividends or lend to Communications is either
restricted or prohibited, except that Graphics may pay specified amounts to
Communications (i) to pay the repurchase price payable to any officer or
employee (or their estates) of Communications, Graphics or any of their
respective subsidiaries in respect of their stock or options to purchase stock
in Communications upon the death, disability or termination of employment of
such officers and employees (so long as no default, or event of default, as
defined, has occurred under the terms of the New Bank Credit Agreement, as
defined below, and provided the aggregate amount of all such repurchases does
not exceed $2,000,000) and (ii) to fund the payment of Communications' operating
expenses incurred in the ordinary course of business, other corporate overhead
costs and expenses (so long as the aggregate amount of such payments does not
exceed $250,000 in any fiscal year) and Communications' obligations pursuant to
a tax sharing agreement with Graphics. Substantially all of Graphics' long-term
obligations have been fully and unconditionally guaranteed by Communications.
8
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The two business sectors of the commercial printing industry in which the
Company operates are printing and digital imaging/prepress services conducted by
its American Color division ("American Color").
1. Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and are in accordance with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The operating results for the three and six
month periods ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ended March 31, 1997. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the fiscal year ended March 31, 1996 and
the Company's Post-Effective Amendment No. 2 to Registration Statement No.
33-97090 on Form S-1.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. The Shakopee Merger
On August 15, 1995, the Shakopee Merger was consummated and each outstanding
share of the Common Stock of Shakopee was converted into one share of the Common
Stock of the Company and 1/20 of one share of Series B Preferred Stock of the
Company. Also on August 15, 1995, concurrent with the Shakopee merger
transaction, the Company refinanced a significant portion of its outstanding
indebtedness, including indebtedness assumed in the Shakopee Merger (the
"Refinancing"). See note 3 for a description of the Refinancing.
The Shakopee Merger has been accounted for as a combination of entities under
common control (similar to a pooling-of-interests), and accordingly, the
unaudited condensed consolidated financial statements give retroactive effect to
the Shakopee Merger and include the combined operations of Communications and
Shakopee subsequent to December 22, 1994.
9
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. The Refinancing
On August 15, 1995, the Company sold $185 million of 12 3/4% Senior Subordinated
Notes Due 2005 (the "New Notes"). In connection with the sale of the New Notes,
the Company entered into a series of transactions (the Refinancing and together
with the Shakopee Merger, the "Transactions"), including the following: (i) the
Company entered into a Credit Agreement with BT Commercial Corporation ("BTCC")
and other financial institutions (the "New Bank Credit Agreement"), providing
Graphics with a $75 million revolving credit facility maturing in 2000 (the "New
Revolving Credit Facility") and a $60 million amortizing term loan with a final
maturity in 2000 (the "New Term Loan"); (ii) the repayment of all $126.5 million
of indebtedness outstanding under Graphics' old bank credit agreement (plus $2.3
million of accrued interest to the date of repayment); (iii) the redemption of
all outstanding 15% Senior Subordinated Notes Due 2000 of Graphics at an
aggregate redemption price of $105.6 million (plus $1.8 million of accrued
interest to the redemption date); (iv) the repayment of all $24.6 million of
indebtedness assumed in the Shakopee Merger (plus $0.1 million of accrued
interest to the date of repayment) and (v) the incurrence of approximately $11.8
million of fees and expenses related to the Transactions. As a result of the
Transactions, the Company recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of $0 taxes. This extraordinary loss
primarily consisted of the early redemption premium on the 15% Senior
Subordinated Notes and the write-off of deferred financing costs related to
refinanced indebtedness partially offset by the write-off of a bond premium
associated with the 15% Senior Subordinated Notes.
Borrowings under the New Revolving Credit Facility are subject to a borrowing
base which consists of (i) 85% of Eligible Accounts Receivable plus (ii) the
lesser of (x) $15.0 million or (y) 60% of Eligible Inventory plus (iii)
Equipment Acquisition Loans in an amount not to exceed $7.5 million outstanding
at any time, each of which must be repaid within six months from the date of
borrowing minus (iv) the aggregate amount of reserves against Eligible Accounts
Receivable and Eligible Inventory established by BTCC.
At September 30, 1996, the remaining New Term Loan amortizes in the following
annual amounts: (i) $4.6 million through the remainder of Fiscal Year 1997, (ii)
$10.6 million in Fiscal Year 1998, (iii) $13.3 million in Fiscal Year 1999, (iv)
$15.2 million in Fiscal Year 2000 and (v) $8.0 million in Fiscal Year 2001.
Communications has guaranteed Graphics' indebtedness under the New Bank Credit
Agreement, as amended (the "Bank Credit Agreement"), which guarantee is secured
by a pledge of all Graphics' and its subsidiaries' stock. In addition,
borrowings under the Bank Credit Agreement are secured by substantially all of
the assets of Graphics. Communications is restricted under its guarantee of the
Bank Credit Agreement from, among other things, entering into mergers,
acquisitions, incurring additional debt and paying dividends. The Company is
currently in compliance with all financial covenants set forth in the Bank
Credit Agreement.
Interest under the Bank Credit Agreement is floating based on prevailing market
rates and is computed using various rate options over periods of 30, 60, 90 or
180 days as selected by the Company.
10
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. The Gowe Acquisition
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina, Ohio
based regional printer of newspapers, T.V. books and retail advertising inserts
and catalogs ("Gowe"), for approximately $6.7 million in cash and assumption of
certain liabilities of Gowe, Inc., pursuant to an Asset Purchase Agreement,
among Graphics, Gowe, Inc. and ComCorp, Inc., the parent company of Gowe, Inc.
(the "Gowe Acquisition"). The Gowe Acquisition was accounted for under the
purchase method of accounting applying the provisions of Accounting Principles
Board Opinion No. 16 ("APB 16"). Pursuant to the requirements of APB 16, the
purchase price was allocated to the tangible assets and identifiable intangible
assets and liabilities assumed based upon their respective fair values.
The Company's pro forma unaudited results of operations for the six months ended
September 30, 1995, assuming that the Gowe Acquisition occurred as of April 1,
1995, were $271.2 million in sales and a $16.6 million net loss.
5. Disposal of 51% Interest in National Inserting Systems, Inc.
On March 11, 1996, the Company sold its 51% interest in National Inserting
Systems, Inc. ("NIS") for approximately $2.5 million in cash and a note for
approximately $0.2 million under the terms of a Stock Redemption Agreement
between NIS and Graphics. This transaction resulted in a net gain on disposal of
approximately $1.3 million, which was classified as other, net in the
consolidated statement of operations for the fiscal year ended March 31, 1996.
The proceeds from the sale were used to repay indebtedness under Graphics' Bank
Credit Agreement (as defined herein).
6. Inventories
The components of inventories are as follows (in thousands):
September 30, 1996 March 31, 1996
------------------ --------------
Paper $ 10,635 11,277
Ink 302 272
Equipment held for sale 366 349
Supplies and other 1,452 1,283
----- ------
Total $ 12,755 13,181
========== ======
In the third quarter of the fiscal year ended March 31, 1996, the Company
changed to the first-in, first-out ("FIFO") method of accounting from the
last-in, first-out ("LIFO") method of accounting as the principal method of
accounting for inventories. The change results in a balance sheet (1) which
reflects inventories at a value that more closely represents current costs which
the Company believes are the primary concern of its constituents (bank lenders,
financial markets, customers, trade creditors, etc.) and (2) that enhances the
comparability of the Company's financial statements by changing to the
predominant method used by key competitors in the printing industry. The effect
(approximately $0.8 million) of the change for the six months ended September
30, 1995 resulted in the retroactive restatement of the first and second
quarters of the fiscal year ended March 31, 1996 of approximately $0.5 million
and $0.3 million, respectively, as a decrease of cost of goods sold and a
decrease to net loss.
11
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Non-recurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated merger
in the six month period ended September 30, 1995.
8. Non-recurring Charge Related to Resignation of Chief Executive Officer
A non-recurring charge of $1.9 million was recorded and is classified as a
selling, general and administrative expense in the quarter ended September 30,
1996 relating to the resignation of the Company's Chief Executive Officer.
Payments under the related agreement continue through 2001, subject to certain
requirements.
9. Restructuring Costs
In April 1995, the Company approved a plan for its American Color division which
is designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. The cost of this
plan is being accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". The estimated pretax costs
associated with this plan of $5.0 million represent employee termination,
goodwill write-down and other related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995, the Company recognized
$2.1 million of such charges, primarily for severance and other personnel
related costs. In the quarter ended September 30, 1995, the Company recognized
$0.6 million of restructuring costs primarily related to hiring and relocating
certain management personnel. In the quarter ended December 31, 1995, the
Company recognized an additional $0.1 million of restructuring costs. In the
quarter ended March 31, 1996, the Company recognized $1.3 million of
restructuring costs, which included $0.9 million of goodwill write-down and $0.4
million primarily related to certain relocation costs associated with the
restructuring. The goodwill write-down related to certain facilities that were
either shut down or relocated as part of the restructuring. In addition,
approximately $0.4 million and $0.1 million of restructuring costs primarily
related to relocation costs were recognized in the quarters ended June 30, 1996
and September 30, 1996, respectively. The remaining costs of approximately $0.4
million, principally related to additional relocation and other transition
expenses, will be recorded as incurred.
10. Commitments and Contingencies
The Company has employment agreements with one of its principal officers and
four other employees. Such agreements provide for minimum salary levels as well
as for incentive bonuses which are payable if specified management goals are
attained. The aggregate commitment for future salaries at September 30, 1996,
excluding bonuses, was approximately $2.3 million.
12
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Graphics, together with over 300 other persons, has been designated by the U.S.
Environmental Protection Agency as a potentially responsible party (a "PRP")
under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA," also known as "Superfund") at one Superfund site. Although liability
under CERCLA may be imposed on a joint and several basis and the Company's
ultimate liability is not precisely determinable, the PRPs have agreed that
Graphics' share of removal costs is 0.46% and therefore Graphics believes that
its share of the anticipated remediation costs at such site will not be material
to its business or financial condition. Based upon an analysis of Graphics'
volumetric share of waste contributed to the site and the agreement among the
PRPs, the Company has recorded a reserve of approximately $0.1 million in
connection with this liability on its consolidated balance sheet at September
30, 1996. The Company believes this amount is adequate to cover such liability.
On December 21, 1989, Graphics sold its ink manufacturing operations and
facilities ("CPS"). Graphics remains contingently liable under $4.7 million of
industrial revenue bonds assumed by the purchaser ("CPS Buyer") in this
transaction. The CPS Buyer which assumed these liabilities has agreed to
indemnify Graphics for any resulting obligation and has also provided an
irrevocable letter of credit in favor of the holders of such bonds. Accordingly,
management believes that any obligation of Graphics under this contingency is
unlikely.
The Company has been named as a defendant in several other legal actions arising
from its normal business activities. In the opinion of management, any liability
that may arise from such actions will not have a material adverse effect on the
consolidated financial statements of the Company.
13
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
General
On August 15, 1995, Shakopee Valley Printing, Inc. ("Shakopee") was merged with
and into Sullivan Graphics, Inc. ("Graphics") (the "Shakopee Merger"). The
merger has been accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the condensed consolidated
financial statements give retroactive effect to the Shakopee Merger and include
the combined operations of Sullivan Communications, Inc. ("Communications") and
Shakopee subsequent to December 22, 1994 (the date on which Shakopee became
under common control with Graphics and Communications (the "Company")).
On March 11, 1996, Graphics sold its 51% interest in National Inserting Systems
("NIS") for approximately $2.5 million in cash and a note for approximately $0.2
million under the terms of a Stock Redemption Agreement between NIS and
Graphics. The proceeds from the sale were used to repay indebtedness under the
Bank Credit Agreement (as defined herein).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina, Ohio
based regional printer of newspapers, T.V. books and retail advertising inserts
and catalogs ("Gowe"), for approximately $6.7 million in cash and assumption of
certain liabilities of Gowe, Inc., pursuant to an Asset Purchase Agreement (the
"Gowe Acquisition"). The Gowe Acquisition was accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). Pursuant to the requirements of APB 16, the purchase
price was allocated to the tangible assets and identifiable intangible assets
and liabilities assumed based upon their respective fair values. The allocation
of the purchase price is preliminary and may change during the allocation
period. Gowe's results of operations for the three months ended September 30,
1996 (the "1996 Three Month Period") and the six months ended September 30, 1996
(the "1996 Six Month Period") are included in the Company's consolidated
financial statements.
During March 1996, the Company completed the construction and start-up of a new
plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech will be dedicated to
the production of commercial flexi books (a form of advertising inserts) serving
various segments of the retail advertising market and the production of T.V.
listing guides serving the newspaper market.
In the 1996 Six Month Period, the Company began to present certain fixed costs
of its American Color production facilities within cost of sales rather than as
selling, general and administrative expenses. This new presentation is
consistent with the Company's presentation of the printing sector's financial
information, and the Company believes that this is a more accurate measure of
the gross margin of the business. The financial information for the three months
ended September 30, 1995 (the "1995 Three Month Period") and the six months
ended September 30, 1995 (the "1995 Six Month Period") for the American Color
sector has been reclassified to conform with this presentation.
14
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table summarizes the Company's results of operations for the 1996
Three-Month Period, the 1995 Three-Month Period, the 1996 Six-Month Period and
the 1995 Six-Month Period.
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands)
Sales:
Printing $ 117,586 $ 110,253 $ 237,928 $ 215,631
American Color 18,204 18,037 35,963 35,990
Other (b) 2,705 2,363 4,308 3,522
--------- --------- --------- ---------
Total $ 138,495 $ 130,653 $ 278,199 $ 255,143
Gross Profit:
Printing $ 12,565 $ 12,526 $ 23,877 $ 25,699
American Color 3,760 3,644 7,140 6,904
Other (b) 1,165 1,025 1,866 1,347
--------- --------- --------- ---------
Total $ 17,490 $ 17,195 $ 32,883 $ 33,950
Gross Margin:
Printing 10.7% 11.4% 10.0% 11.9%
American Color 20.7% 20.2% 19.9% 19.2%
Total 12.6% 13.2% 11.8% 13.3%
Operating Income
(Loss):
Printing $ 6,981 $ 7,260 $ 13,006 $ 16,241
American Color (a) 475 6 (469) (1,188)
Other (b) (c) (4,941)(d) (3,025) (8,140)(d) (6,494)
--------- --------- --------- ---------
Total $ 2,515 $ 4,241 $ 4,397 $ 8,559
(a) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
Month Period and $0.6 million in the 1995 Three Month Period, $0.5 million
in the 1996 Six Month Period and $2.7 million in the 1995 Six Month Period.
(b) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), and its
wholly-owned subsidiary, Sullivan Media Corporation ("SMC").
(c) Also reflects corporate selling, general and administrative expenses, and
amortization expense.
(d) Also reflects non-recurring charge of $1.9 million related to the
resignation of the Company's Chief Executive Officer (see note 8 to the
Unaudited Condensed Consolidated Financial Statements).
15
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing
Sales. Printing sales increased $22.3 million to $237.9 million in the 1996 Six
Month Period from $215.6 million in the 1995 Six Month Period. This increase
includes $22.8 million of sales by Gowe and Flexi-Tech and an approximate 4%
increase in volume (excluding Gowe and Flexi-Tech). These increases were
partially offset by a decrease in paper prices, the effect of an increase in
customer supplied paper, and the impact of competitive pricing pressure, which
in part resulted from the continuing impact of the weak retail environment which
existed throughout the second half of Fiscal Year 1996.
Printing sales increased $7.3 million to $117.6 million in the 1996 Three Month
Period from $110.3 million in the 1995 Three Month Period. This increase
includes $10.9 million of sales by Gowe and Flexi-Tech and an approximate 8%
increase in volume (excluding Gowe and Flexi-Tech). These increases were
partially offset by a decrease in paper prices, the effect of an increase in
customer supplied paper, and the impact of competitive pricing pressure, which
in part resulted from the continuing impact of the weak retail environment which
existed throughout the second half of Fiscal Year 1996.
Gross Profit. Printing gross profit decreased $1.8 million to $23.9 million in
the 1996 Six Month Period from $25.7 million in the 1995 Six Month Period.
Printing gross margin decreased to 10.0% in the 1996 Six Month Period from 11.9%
in the 1995 Six Month Period. The decrease in gross profit and gross margin
includes the impact of continued competitive pricing pressure, a reduction in
the price of scrap paper, an increase in depreciation expense and incremental
costs related to the start-up of Flexi-Tech. These decreases were partially
offset by reduced variable production and certain other manufacturing costs due
to continued cost containment programs at the printing plants, the effect of
higher volume and incremental gross margin from Gowe.
Printing gross profit increased $0.1 million to $12.6 million in the 1996 Three
Month Period from $12.5 million in the 1995 Three Month Period. Printing gross
margin decreased to 10.7% in the 1996 Three Month Period from 11.4% in the 1995
Three Month Period. The increase in gross profit includes the effect of higher
volume, the impact of reduced variable production and certain other
manufacturing costs due to continued cost containment programs at the printing
plants and incremental gross margin from Gowe. These increases were partially
offset by continued competitive pricing pressure, a reduction in the price of
scrap paper, an increase in depreciation expense and incremental costs related
to the start-up of Flexi-Tech. The decrease in gross margin as a percentage of
sales is primarily due to the impact of continued competitive pricing pressure
and a reduction in the price of scrap paper.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses increased to $10.9 million or 4.6% of printing sales in
the 1996 Six Month Period from $9.5 million or 4.4% of printing sales in the
1995 Six Month Period. This increase includes selling, general and
administrative expenses of Gowe and Flexi-Tech, and increased sales and
marketing expenses offset in part by decreases in certain employee related
expenses.
Printing selling, general and administrative expenses increased to $5.6 million
or 4.8% of printing sales in the 1996 Three Month Period from $5.3 million or
4.8% of printing sales in the 1995 Three Month Period. This increase includes
selling, general and administrative expenses of Gowe and Flexi-Tech, and
increased sales and marketing expenses.
Operating Income. As a result of the above factors, operating income from the
printing business decreased to $13.0 million in the 1996 Six Month Period from
$16.2 million in the 1995 Six Month Period and decreased to $7.0 million in the
1996 Three Month Period from $7.3 million in the 1995 Three Month Period.
16
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American Color
Sales. American Color's sales were $36.0 million in both the 1996 Six Month
Period and the 1995 Six Month Period.
American Color's sales increased $0.2 million to $18.2 million in the 1996 Three
Month Period from $18.0 million in the 1995 Three Month Period. This increase is
primarily the result of increases in digital visual effects work partially
offset by lower prepress production volume.
Gross Profit. American Color's gross profit increased $0.2 million to $7.1
million in the 1996 Six Month Period from $6.9 million in the 1995 Six Month
Period. American Color's gross margin increased to 19.9% in the 1996 Six Month
Period from 19.2% in the 1995 Six Month Period. These increases are primarily
the result of cost savings in material and other production costs offset in part
by facilities management start-up costs.
American Color's gross profit increased $0.2 million to $3.8 million in the 1996
Three Month Period from $3.6 million in the 1995 Three Month Period. American
Color's gross margin increased to 20.7% in the 1996 Three Month Period from
20.2% in the 1995 Three Month Period. These increases are primarily the result
of cost savings in material and other production costs offset in part by
facilities management start-up costs.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses increased to $7.1 million or 19.8% of American
Color's sales in the 1996 Six Month Period from $5.4 million or 14.9% of
American Color's sales in the 1995 Six Month Period. These increases are
primarily a result of increased sales and marketing expenses and the addition of
operations and administrative personnel and related expenses, including its
digital visual effects group.
American Color's selling, general and administrative expenses increased to $3.2
million or 17.6% of American Color's sales in the 1996 Three Month Period from
$3.0 million or 16.6% of American Color's sales in the 1995 Three Month Period.
Operating Income (Loss). As a result of the above factors and the incurrence of
restructuring costs related primarily to employee termination and other expenses
associated with the American Color restructuring plan of $0.5 million, $2.7
million, $0.1 million and $0.6 million in the 1996 Six Month Period, the 1995
Six Month Period, the 1996 Three Month Period and the 1995 Three Month Period,
respectively, operating losses at American Color were reduced to a loss of $0.5
million in the 1996 Six Month Period from a loss of $1.2 million in the 1995 Six
Month Period. Operating income at American Color increased to income of $0.5
million in the 1996 Three Month Period from zero in the 1995 Three Month Period.
See discussion below for information regarding the American Color restructuring
plan.
17
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other Operations
Other operations consist primarily of revenues and expenses associated with the
Company's 51% owned subsidiary, NIS (sold March 11, 1996), and its wholly-owned
subsidiary, SMC. In addition, other operations include corporate selling,
general and administrative and other expenses and amortization expense.
Amortization expense related to other operations, including goodwill
amortization (see below), was $4.4 million, $4.8 million, $2.1 million and $2.4
million, in the 1996 Six Month Period, the 1995 Six Month Period, the 1996 Three
Month Period and the 1995 Three Month Period, respectively.
Operating losses from other operations increased $1.6 million to a loss of $8.1
million in the 1996 Six Month Period from a loss of $6.5 million in the 1995 Six
Month Period. This increase includes the $1.9 million non-recurring charge
related to the resignation of the Company's Chief Executive Officer (see note 8
to the Unaudited Condensed Consolidated Financial Statements).
Operating losses from other operations increased $1.9 million to a loss of $4.9
million in the 1996 Three Month Period from a loss of $3.0 million in the 1995
Three Month Period. This increase also includes the $1.9 million non-recurring
charge related to the resignation of the Company's Chief Executive Officer.
Goodwill Amortization
Amortization expense associated with goodwill was $4.1 million, $4.3 million,
$2.1 million and $2.2 million for the 1996 Six Month Period, the 1995 Six Month
Period, the 1996 Three Month Period and the 1995 Three Month Period,
respectively.
Restructuring Costs
In April 1995, the Company approved a plan for its American Color division which
is designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. The cost of this
plan is being accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". The estimated pretax costs
associated with this plan of $5.0 million represent employee termination,
goodwill write-down and other related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995, the Company recognized
$2.1 million of such charges, primarily for severance and other personnel
related costs. In the quarter ended September 30, 1995, the Company recognized
$0.6 million of restructuring costs, related primarily to hiring and relocating
certain management personnel. In the quarter ended December 31,1995, the Company
recognized an additional $0.1 million of restructuring costs. In the quarter
ended March 31, 1996, the Company recognized $1.3 million of restructuring
costs, which included $0.9 million of goodwill write-down and $0.4 million
primarily related to certain relocation costs associated with the restructuring.
The goodwill write-down related to certain facilities that were either shut down
or relocated as part of the restructuring. In addition, approximately $0.4
million and $0.1 million of restructuring charges primarily related to
relocation costs were recognized in the quarters ended June 30, 1996 and
September 30, 1996, respectively. The remaining costs of approximately $0.4
million, principally related to additional relocation and other transition
expenses, will be recorded as incurred.
18
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest Expense
Interest expense increased 18.9% to $18.1 million in the 1996 Six Month Period
from $15.2 million in the 1995 Six Month Period. Interest expense increased
18.2% to $9.5 million in the 1996 Three Month Period from $8.0 million in the
1995 Three Month Period. These increases are primarily the result of increased
average indebtedness levels including indebtedness related to the Transactions
(see note 3 to the Unaudited Condensed Consolidated Financial Statements) and
obligations under capital leases.
Non-recurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated merger
in the 1995 Six Month Period.
Other Expense, Net
Other expense, net decreased to expense of $0 million in the 1996 Six Month
Period from expense of $1.0 million in the 1995 Six Month Period. Other expense,
net decreased to expense of $0 million in the 1996 Three Month Period from
expense of $0.9 million in the 1995 Three Month Period. These decreases
primarily include the impact of reduced expenses associated with an employee
benefit program.
Income Tax Expense
Income tax expense decreased to $1.6 million in the 1996 Six Month Period from
$3.2 million in the 1995 Six Month Period and increased to $0.6 million in the
1996 Three Month Period from $0.4 million in the 1995 Three Month Period. These
changes are primarily due to the Shakopee Merger, smaller amounts of taxable
income in foreign jurisdictions, the sale of NIS and changes in the deferred tax
valuation allowance.
Net Loss
As a result of the factors discussed above, the Company's net loss decreased to
$15.2 million in the 1996 Six Month Period from $16.7 million in the 1995 Six
Month Period, and decreased to $7.5 million in the 1996 Three Month Period from
$9.5 million in the 1995 Three Month Period.
19
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
In August 1995, the Company refinanced substantially all of its existing
indebtedness (the "Refinancing") (see note 3 to the Unaudited Condensed
Consolidated Financial Statements). The primary objectives of the Refinancing
were to gain greater financial and operating flexibility, to facilitate the
merger with Shakopee, to refinance near-term debt service requirements and to
provide further opportunity for internal growth and growth through acquisitions.
As part of the Refinancing, the Company received gross proceeds of $185 million
from the sale of 12 3/4% Senior Subordinated Notes Due 2005 (the "New Notes").
The gross proceeds of the offering of the New Notes, together with $85.6 million
in borrowings under the amended credit agreement with BT Commercial Corporation
and other financial institutions (the "Bank Credit Agreement"), and existing
cash balances were used (i) to redeem all $100 million principal amount of the
15% Senior Subordinated Notes at a redemption price of $105.6 million (plus $1.8
million of accrued interest to September 15, 1995, the redemption date), (ii) to
repay all $126.5 million of indebtedness outstanding under Graphics' old bank
credit agreement (plus $2.3 million of accrued interest at the repayment date),
(iii) to repay all $24.6 million of indebtedness assumed in the Shakopee Merger
(plus $0.1 million of accrued interest at the repayment date) and (iv) to fund
approximately $11.8 million of fees and expenses incurred in connection with the
Transactions.
The Bank Credit Agreement includes a revolving credit facility which matures on
September 30, 2000 (the "New Revolving Credit Facility"), providing for a
maximum of $75 million of borrowing availability, subject to a borrowing base
requirement (see note 3 to the Unaudited Condensed Consolidated Financial
Statements). As of October 31, 1996, the Company had borrowings of $37.9 million
outstanding under the New Revolving Credit Facility and $13.5 million of
additional borrowing availability. The Company expects that it will from time to
time during the fiscal year ending March 31, 1997 ("Fiscal Year 1997") use a
substantial portion of its availability in the normal course of its operations.
The Bank Credit Agreement also provides for a $60 million amortizing term loan
with a final maturity on September 30, 2000 (the "New Term Loan"). Remaining
Fiscal Year 1997 scheduled payments due under the New Term Loan are $4.6
million.
Cash from operations and net borrowings under the New Revolving Credit Facility
(see the Unaudited Condensed Consolidated Statements of Cash Flows) were used to
repay $4.5 million in scheduled principal payments on indebtedness during the
1996 Six Month Period. Additionally, these cash sources were used to fund the
Company's cash capital expenditures during the 1996 Six Month Period of $5.0
million and the repayment of capital lease obligations of $1.3 million. The
Company plans to continue its program of upgrading its printing and prepress
equipment and expanding production capacity and currently anticipates that full
year Fiscal Year 1997 cash capital expenditures will approximate $13 million and
repayment of capital lease obligations will approximate $3.5 million. In
addition, the Company plans to acquire equipment under capital leases of
approximately $29 million during full year Fiscal Year 1997. The Company had
zero cash and cash equivalents on hand at September 30, 1996 due to a
requirement under the Bank Credit Agreement that substantially all of the
Company's daily available funds be used to reduce borrowings under the New
Revolving Credit Facility. The Company expects that its ongoing liquidity
requirements during Fiscal Year 1997 will be met from cash from operations and
amounts available under the Bank Credit Agreement. The Company is currently in
compliance with all financial covenants set forth in the Bank Credit Agreement.
20
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At September 30, 1996, the Company had total debt outstanding of $311.4 million,
including capital lease obligations. Of the total debt outstanding at September
30, 1996, $94.3 million was outstanding under the Bank Credit Agreement at a
weighted average interest rate of 8.25%. Indebtedness under the Bank Credit
Agreement bears interest at floating rates, causing the Company to be sensitive
to prevailing interest rates. At September 30, 1996, the Company had
indebtedness other than obligations under the Bank Credit Agreement of $217.1
million (including $185 million of New Notes).
21
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
EBITDA
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands)
EBITDA:
Printing $ 12,004 $ 11,176 $ 22,815 $ 24,212
American Color (a) 1,966 1,252 2,313 1,245
Other (b) (c) (2,864)(d) (553) (3,746)(d) (1,558)
-------- -------- -------- --------
Total $ 11,106 $ 11,875 $ 21,382 $ 23,899
EBITDA Margin:
Printing 10.2% 10.1% 9.6% 11.2%
American Color 10.8% 6.9% 6.4% 3.5%
Total 8.0% 9.1% 7.7% 9.4%
(a) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
Month Period and $0.6 million in the 1995 Three Month Period, $0.5 million
in the 1996 Six Month Period and $2.7 million in the 1995 Six Month Period.
(b) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), and its
wholly owned subsidiary SMC.
(c) Also reflects corporate selling, general and administrative expenses.
(d) Also reflects a non-recurring charge of $1.9 million related to the
resignation of the Company's Chief Executive Officer (see note 8 to the
Unaudited Condensed Consolidated Financial Statements).
EBITDA is presented and discussed because management believes that investors
regard EBITDA as a key measure of a leveraged company's performance and ability
to meet its future debt service requirements. "EBITDA" is defined as earnings
before net interest expense, income tax (expense) benefit, depreciation,
amortization, other special charges related to asset write-offs and write-downs,
other income (expense), discontinued operations and extraordinary items. "EBITDA
Margin" is defined as EBITDA as a percentage of net sales. EBITDA is not a
measure of financial performance under generally accepted accounting principles
and should not be considered an alternative to net income (or any other measure
of performance under generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity. Certain covenants in
the New Notes and the Bank Credit Agreement are based on EBITDA, subject to
certain adjustments.
22
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing. As a result of the reasons previously described under "--Printing"
(excluding the increase in depreciation expense), Printing EBITDA decreased to
$22.8 million in the 1996 Six Month Period from $24.2 million in the 1995 Six
Month Period, representing a decrease of $1.4 million, and the Printing EBITDA
Margin decreased to 9.6% in the 1996 Six Month Period from 11.2% in the 1995 Six
Month Period. Printing EBITDA increased to $12.0 million in the 1996 Three Month
Period from $11.2 million in the 1995 Three Month Period, representing an
increase of $0.8 million, and the Printing EBITDA Margin increased to 10.2% in
the 1996 Three Month Period from 10.1% in the 1995 Three Month Period.
American Color. As a result of the reasons previously described under
"--American Color," American Color's EBITDA increased to $2.3 million in the
1996 Six Month Period from $1.2 million in the 1995 Six Month Period,
representing an increase of $1.1 million, and the American Color EBITDA Margin
increased to 6.4% in the 1996 Six Month Period from 3.5% in the 1995 Six Month
Period. These EBITDA increases included restructuring costs of $0.5 million in
the 1996 Six Month Period as compared with $2.7 million in the 1995 Six Month
Period. American Color's EBITDA increased to $2.0 million in the 1996 Three
Month Period from $1.3 million in the 1995 Three Month Period, representing an
increase of $0.7 million, and the American Color EBITDA Margin increased to
10.8% in the 1996 Three Month Period from 6.9% in the 1995 Three Month Period.
These EBITDA increases included Restructuring costs of $0.1 million in the 1996
Three Month Period as compared with $0.6 million in the 1995 Three Month Period.
Other. As a result of the reasons previously described under "--Other
Operations" (excluding changes in amortization expense), other operations
negative EBITDA increased to negative EBITDA of $3.7 million in the 1996 Six
Month Period from negative EBITDA of $1.6 million in the 1995 Six Month Period.
Other operations negative EBITDA increased to negative EBITDA of $2.9 million in
the 1996 Three Month Period from negative EBITDA of $0.6 million in the 1995
Three Month Period. EBITDA for the 1996 Six Month Period and the 1996 Three
Month Period includes the impact of a $1.9 million non-recurring charge related
to the resignation of the Company's Chief Executive Officer.
Change in Inventory Valuation Method
During the third quarter of the fiscal year ended March 31, 1996, the Company
changed to the first-in, first-out ("FIFO") method of accounting from the
last-in, first-out ("LIFO") method of accounting as the principal method of
accounting for inventories. The change results in a balance sheet (1) which
reflects inventories at a value that more closely represents current costs which
the Company believes are the primary concern of its constituents (bank lenders,
financial markets, customers, trade creditors, etc.) and (2) that enhances the
comparability of the Company's financial statements by changing to the
predominant method used by key competitors in the printing industry. The effect
(approximately $0.8 million) of the change for the six months ended September
30, 1995 resulted in the retroactive restatement of the first and second
quarters of the fiscal year ended March 31, 1996 of approximately $0.5 million
and $0.3 million , respectively, as a decrease of cost of goods sold and a
decrease to net loss.
23
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Part II Other Information
Item 1. (a) Legal Proceedings
Reference is made to Item 3 (Legal Proceedings) disclosure in the
Company's Form 10-K filed for the fiscal year ended March 31,
1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.1(d) August 13, 1996, Fourth Amendment to Credit
Agreement, dated as of August 15, 1995, among
Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto
10.3 Resignation letter, dated as of September 18,
1996, between Graphics and James T. Sullivan
10.4(d) Amendment to Employment Agreement, dated September
18, 1996, between Graphics and Stephen M. Dyott
10.8 Severance agreement, dated October 3, 1996,
between Graphics and Patrick W. Kellick
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None were filed during the quarter ended September 30, 1996.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Communications and Graphics have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
Date November 13, 1996 By /s/ Joseph M. Milano
-------------------------- ---------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date November 13, 1996 By /s/ Patrick W. Kellick
-------------------------- ---------------------
Patrick W. Kellick
Vice President - Corporate Controller
(Chief Accounting Officer)
25
FOURTH AMENDMENT TO CREDIT AGREEMENT
FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated
as of August 13, 1996, among SULLIVAN COMMUNICATIONS, INC. ("Communications"),
SULLIVAN GRAPHICS, INC. (the "Borrower"), the financial institutions party to
the Credit Agreement referred to below (the "Lenders"), BT COMMERCIAL
CORPORATION, as Agent (the "Agent") for the Lenders, and BANKERS TRUST COMPANY,
as Issuing Bank (the "Issuing Bank"). All capitalized terms used herein and not
otherwise defined shall have the respective meanings provided such terms in the
Credit Agreement.
W I T N E S S E T H :
WHEREAS, Communications, the Borrower, the Lenders, the Agent
and the Issuing Bank are parties to a Credit Agreement, dated as of August 15,
1995 (as amended, modified or supplemented to the date hereof, the "Credit
Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. The definition of "Material Equipment" appearing in Section
1.1 of the Credit Agreement is hereby amended by inserting the phrase "(or
related items)" immediately after the word "item" in each place it appears in
said definition.
2. Section 2.3 of the Credit Agreement is hereby amended by
deleting the phrase "an item of Material Equipment" appearing therein and
inserting in lieu thereof the phrase "an item which constitutes (or is one of a
number of related items which together constitute or will constitute) Material
Equipment."
3. Notwithstanding anything to the contrary contained in the
Credit Agreement or any other Credit Document, (i) to the extent the Borrower or
any of its Subsidiaries enters into any operating lease which does not cause a
violation of the terms of the Credit Agreement, the Collateral Agent is
authorized to enter into such disclaimers of a security interest in the assets
subject to such operating lease, or such releases or subordinations of the
assets subject to such operating lease, as may be requested by the Borrower in
connection therewith and (ii) in connection with the incurrence of any
Indebtedness permitted to remain outstanding pursuant to Section 8.3(b) of the
Credit Agreement, at the request of the Borrower the Collateral Agent shall, and
is hereby authorized to, enter into such releases or subordinations of security
interests in the assets securing such Indebtedness in accordance with the
relevant requirements of such Section
-1-
<PAGE>
8.2, all as may be requested by the Borrower. In taking any actions pursuant to
the requirements of this Section 3, the Collateral Agent shall be entitled to
rely on a certificate of an officer of the Borrower as to its entitlement to
such release, subordination or other action, and shall have no liability in
connection therewith.
4. In order to induce the Lenders to enter into this
Amendment, the Borrower hereby represents and warrants that:
(a) no Default or Event of Default exists as of the Fourth
Amendment Effective Date (as defined below), both before and after
giving effect to this Amendment; and
(b) all of the representations and warranties contained in the
Credit Agreement and the other Credit Documents are true and correct in
all material respects on the Fourth Amendment Effective Date, both
before and after giving effect to this Amendment, with the same effect
as though such representations and warranties had been made on and as
of the Fourth Amendment Effective Date (it being understood that any
representation or warranty made as of a specific date shall be true and
correct in all material respects as of such specific date).
5. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
6. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
7. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
8. This Amendment shall become effective on the date (the
"Fourth Amendment Effective Date") when each of Communications, the Borrower and
the Required Lenders shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at 14 Wall Street, New York, New York 10005
Attention: Linda McCormack.
9. From and after the Fourth Amendment Effective Date, all
references in the Credit Agreement and each of the other Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby.
* * *
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
SULLIVAN COMMUNICATIONS, INC.
By /s/ Joseph M. Milano
Title:
SULLIVAN GRAPHICS, INC.
By /s/ Joseph M. Milano
Title:
BT COMMERCIAL CORPORATION,
Individually and as Agent
By /s/ Basil Palmeri
Title:
BTM CAPITAL CORPORATION
By___________________________________________
Title:
BANK OF NEW YORK COMMERCIAL
CORPORATION
By /s/ Stephen V. Mangiante
Title:
<PAGE>
DEUTSCHE FINANCIAL SERVICES
HOLDING CORP.
By /s/ Mark Marktauber
Title:
FINOVA CAPITAL CORPORATION
By /s/ Ron B. Bornstein
Title:
GIBRALTAR CORPORATION OF
AMERICA
By /s/ Harvey Friedman
Title:
LASALLE NATIONAL BANK
By /s/ Christopher G. Clifford
Title:
SANWA BUSINESS CREDIT
CORPORATION
By /s/ Michael J. Cox
Title:
Sullivan Graphics, Inc.
225 High Ridge Road
Stamford, Connecticut 06905
September 18, 1996
Mr. James T. Sullivan
25 Field Point Circle
Greenwich, Connecticut 06830
Dear Jim:
This letter agreement (the "Agreement") sets forth our mutual
agreement concerning your resignation as an employee of Sullivan Graphics, Inc.,
a New York corporation (the "Company").
1. Resignation in All Capacities; Vice Chairman. (a) Your
employment with the Company and its affiliates will terminate in all capacities
as of September 18, 1996 (the "Effective Date"). In that regard, you hereby
resign, effective as of the Effective Date, (i) from your positions as Chairman
of the Board and Chief Executive Officer and a director of Sullivan
Communications, Inc., a Delaware corporation ("Communications"), (ii) from all
other officer and directorships that you currently hold with Communications, the
Company or any of their respective subsidiaries or affiliates and (iii) as a
member of the Committee that administers the Sullivan Communications, Inc. Stock
Option Plan (the "Option Plan") or any other committee of Communications, the
Company or any of their respective subsidiaries or affiliates. From the
Effective Date through April 8, 1999, you will have the title of Vice Chairman
of Communications (subject to the right of the Board of Directors of
Communications (the "Communications Board") to remove you from such position in
its sole discretion); provided, however, that you (i) will not be entitled to
participate in any meetings of the Communications Board, (ii) will not have the
right to vote on any matters coming before the Communications Board and (iii)
will take no action on behalf of Communications other than at the express
direction of the Communications Board; provided further, however, that you will
have the right to resign from your position as Vice Chairman of Communications
at any time without prejudice to any of your rights under this Agreement or any
of the plans and agreements referred to in Section 14(a). In your capacity of
Vice Chairman of Communications you will not be an employee, officer or director
of Communications nor will you be entitled to any compensation or benefits with
respect to your services as such.
(b) It is hereby expressly agreed that the termination of your
employment with the Company and its affiliates will be treated as a termination
by the Company without "cause" for purposes of any applicable plan, arrangement
or agreement between you and the
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2
Company or its affiliates including, without limitation, the Company's
Supplemental Executive Retirement Plan, the Management Equity Agreement, the
Option Plan and the Stock Option Agreements (as each such Agreement and Plan is
defined herein).
2. Sale of Sullivan Media Corporation. (a) As of the Effective
Date, you will be appointed as Chief Executive Officer of Sullivan Media
Corporation, a Delaware corporation ("SMC"), subject to the right of the
Communications Board or the Board of Directors of SMC to remove you from such
position in its sole discretion; provided, however, that you will have the right
to resign from your position as Chief Executive Officer of SMC at any time
without prejudice, except as set forth in Section 2(b), to any of your rights
under this Agreement or any of the plans and agreements referred to in Section
14(a). The Company acknowledges that your status as Chief Executive Officer of
SMC will not require your full-time services and will not preclude you from
accepting employment with a third party, subject, however, to your obligations
under this Agreement and your compliance with the covenants described in Section
8. You will act in the capacity of Chief Executive Officer of SMC solely at the
direction of the Communications Board. In addition, you hereby agree that as
Chief Executive Officer of SMC you will, at the direction of the Communications
Board, use your reasonable commercial efforts to effect the sale of a
controlling interest in the equity, or all or substantially all of the assets,
of SMC to a third party that is not an affiliate of the Company (the "SMC Sale")
by March 18, 1997. Any decision to effect the SMC Sale will be made in the sole
discretion of the Communications Board, and the Communications Board may
determine not to pursue the SMC Sale in its sole discretion without any
obligation to you under this Agreement. Your status as Chief Executive Officer
of SMC will automatically terminate on the earlier of March 18, 1997 or the date
on which the SMC Sale is consummated; provided, however, that such status may be
extended if mutually agreed by you and the Communications Board. Except as
provided in Section 2(b) below, you will not be entitled to any compensation or
benefits with respect to your services as Chief Executive Officer of SMC.
(b) In the event that (i) the SMC Sale is consummated by March
18, 1997 or (ii) a binding agreement (subject to customary closing conditions)
for the SMC Sale is entered into by the Company by March 18, 1997 and the SMC
Sale is subsequently consummated pursuant to such agreement, as it may be
amended from time to time, the Company will pay to you, as promptly as
practicable after the consummation of the SMC Sale, an amount (the "SMC Bonus")
in cash equal to 20% of the amount of the net cash proceeds realized by the
Company or SMC, as the case may be, on such sale, which amount will be
determined after subtracting (w) the Company's investment in SMC, including,
without limitation, SMC's payable to Sullivan Marketing, Inc. (the "SMI
Payable") to the extent the SMI Payable is not paid in cash at the closing of
the SMC Sale and is not expected (in the reasonable judgement of the
Communications Board) to be paid in cash within 60 days after such closing, (x)
the aggregate amount of SMC's intercompany indebtedness, accounts payable (other
than the SMI Payable) and similar obligations that are not assumed by the buyer,
or if so assumed are not ultimately satisfied, (y) any other liabilities of SMC
that are satisfied out of such proceeds and (z) any taxes, transaction costs and
out-of-pocket expenses incurred in connection with the SMC Sale or liquidation
of SMC following the
<PAGE>
3
SMC Sale (if structured as a sale of assets); provided, however, that the SMC
Bonus will not be paid to you if your status as Chief Executive Officer of SMC
terminates prior to the earlier of March 18, 1997 or the date on which the SMC
Sale is consummated for any reason other than your death, permanent disability
or removal by the Communications Board or the Board of Directors of SMC without
just cause. For purposes of this Section 2(b), the "net cash proceeds" realized
by the Company or SMC, as the case may be, will include any net cash proceeds
realized by the Company or SMC (i) on the subsequent liquidation or satisfaction
of any non-cash consideration received by the Company or SMC in the SMC Sale
(including the liquidation of any stock dividends received on such non-cash
consideration) (it being understood that if such non-cash consideration is
readily marketable, the Company or SMC, as the case may be, will use reasonable
efforts to promptly sell such non-cash consideration on terms and conditions
acceptable to the Communications Board in its sole discretion), and (ii) from
any cash interest, cash dividends or other cash distributions paid with respect
to such non-cash consideration. Anything in this Agreement to the contrary
notwithstanding, to the extent that (i) the limitations or restrictions
applicable to Communications, the Company, SMC or any of their respective
subsidiaries under the laws of the State of Delaware or the State of New York,
as the case may be, the restrictions or limitations contained in any such
company's Certificate of Incorporation or any other applicable law, rule or
regulation or under the terms of any indebtedness for borrowed money of
Communications, the Company, SMC or any of their respective subsidiaries
prohibit the Company from paying the SMC Bonus or (ii) the Communications Board
determines in good faith that the Company is not financially capable of paying
the SMC Bonus, then the Company will not be obligated to make such payment
currently, and will have the right to defer such payment until the
Communications Board reasonably determines that such limitations and
restrictions no longer restrict the Company from making such deferred payment.
Any amounts the payment of which is so deferred will bear interest, compounded
annually and calculated at a rate equal to the T-Bill Rate (as defined in the
Option Plan) plus 50 basis points per annum from the closing date for the SMC
Sale and will be paid (with interest) promptly after, and to the extent that,
the Communications Board determines that the limitations and restrictions
referred to in the previous sentence no longer restrict such payment.
3. Severance Benefits. The Company will provide you with the
following severance payments and benefits:
(a) Severance Payments. The Company will pay you the payments
and provide you with the benefits described, and on the terms and
conditions set forth, in Section 5.1 of the Employment Agreement dated
as of April 8, 1993, as amended effective December 1, 1994 (the
"Existing Agreement") and as modified by Section 12 hereof, between the
Company and you, over the period (the "Severance Period") commencing on
the Effective Date and ending on April 8, 1999. Such payments (and any
other payments made to you under this Agreement) will be reduced by
applicable withholding taxes.
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4
(b) Office Space. Until the termination of your status as
Chief Executive Officer of SMC, the Company will make available to you
an office for your use at the offices of SMC in New York City, and the
Company will reimburse you for any out-of-pocket expenses reasonably
incurred by you in connection with the performance of your services to
SMC, provided that any such expenses in excess of $1,000 in the
aggregate have been approved in writing in advance by the Chief
Executive Officer of Communications.
(c) Automobile. Until September 1, 1997, the Company will
continue to reimburse you for your reasonable expenses in connection
with the leasing and insuring of your existing BMW automobile.
(d) No Other Compensation or Benefits. Except as otherwise
provided herein, you will not be entitled to any compensation or
benefits or to participate in any past, present or future employee
benefit programs or arrangements of the Company, Communications or any
of their respective subsidiaries or affiliates on or after the
Effective Date (including, without limitation, any compensation or
benefits under Section 4 of the Existing Agreement or under any
proposed management incentive, bonus, option bonus or gain sharing
programs or arrangements), provided that you will be entitled to
receive your vested accrued benefits under the Company's Supplemental
Executive Retirement Plan and Retirement Savings Plan in accordance
with the terms and conditions of such plans. With respect to the
continuation of your medical insurance coverage during the Severance
Period under the Company's group health plan, pursuant to the terms of
Section 5.1 of the Existing Agreement, the Company will continue to pay
the employer portion of the applicable premiums during the Severance
Period.
4. Communications Stock. Your shares of Common Stock, par
value $.01 per share (the "Common Stock"), of Communications and Series A
Preferred Stock, par value $.01 per share, of Communications (together with your
Common Stock, the "Shares"), which Shares were purchased by you pursuant to the
Management Equity Agreement dated as of April 8, 1993 (the "Management Equity
Agreement") between Communications and you, will remain subject to the terms and
conditions of the Management Equity Agreement and the Amended and Restated
Stockholders' Agreement dated as of August 14, 1995 (the "Stockholders'
Agreement") among Communications and the other parties signatory thereto;
provided, however, that Communications' Call Right (as defined in the Management
Equity Agreement) under Section 4 of the Management Equity Agreement will remain
exercisable until September 18, 1997; provided further, however, that in the
event such Call Right is exercised more than 90 days after the Effective Date,
the "Applicable Value" for purposes of the Call Right will be deemed to be the
Applicable Value as of the date of the exercise of the Call Right.
5. Communications Stock Options. Your options (the "Options")
to purchase shares of Common Stock, which Options were granted to you pursuant
to the Option Plan, will, to the extent such Options have become Vested Options
(as defined in the
<PAGE>
5
Option Plan) as of the Effective Date, remain exercisable, subject to Section
8(b) of the Option Plan, until the earlier of (A) September 18, 1997 or (B)
exercise by Communications of its Call Right (as defined in the Option Plan)
under Section 9 of the Option Plan; provided, however, that Communications' Call
Right will remain exercisable until September 18, 1997; provided further,
however, that in the event such Call Right is exercised more than 180 days after
the Effective Date, the "Applicable Value" for purposes of the Call Right will
be deemed to be the Applicable Value as of the date of the exercise of the Call
Right. Your Vested Options will otherwise remain subject to the terms and
conditions of the Option Plan and the Option Agreements (as defined in Section
14). Any Options that have not become Vested Options as of the Effective Date
will be forfeited and cancelled as of the Effective Date without payment
therefor.
6. Consulting Engagement. Provided that you do not materially
breach any provision of Section 8, 9, 10 or 11 of this Agreement or any
provision of Section 8 of the Existing Agreement and fail to cure any such
material breach that is susceptible to cure within 10 days following written
notice from the Company or Communications detailing such breach, you will be
engaged as a consultant to Communications for a period (the "Consulting Period")
beginning on April 9, 1999 and terminating on the second anniversary thereof.
Your services hereunder during the Consulting Period will consist of such
consulting and advisory services, and will be provided at such times, as may be
requested from time to time by the Board of Directors or Chief Executive Officer
of Communications; provided, however, that such services will not be required
for more than 4 working days during any one-month period. During the Consulting
Period, as compensation for the consulting services to be performed by you
hereunder, Communications will pay you a fee (the "Consulting Fee") of $200,000
per annum, payable in equal installments not less frequently than quarterly (it
being understood and agreed that you will be entitled to payment of such
Consulting Fee regardless of the extent, if any, to which Communications
actually requires you to perform such consulting services). In the event of your
death prior to or during the Consulting Period, the Consulting Fee will continue
to be paid during the Consulting Period (or remainder thereof) to the
beneficiary designated in writing for this purpose by you or, if no such
beneficiary is specifically designated, to your estate.
7. Nonemployee Status. You will not be treated as an employee
of Communications, the Company, SMC or any of their respective subsidiaries or
affiliates on or at any time after the Effective Date (including, without
limitation, during your tenure as Vice Chairman of Communications or Chief
Executive Officer of SMC or during the Consulting Period) for purposes of any
past, present or future employee benefit plan, program or arrangement of
Communications, the Company, SMC or any of their respective subsidiaries or
affiliates.
8. Nonsolicitation; Confidentiality; Noncompetition. Your
covenants contained in Section 8 of the Existing Agreement are incorporated
herein by reference as if such covenants were set forth herein in full;
provided, however, that your nonsolicitation and
<PAGE>
6
noncompetition covenants set forth in Sections 8.1 and 8.3, respectively, of the
Existing Agreement will continue in effect through April 8, 2001.
9. Cooperation. From and after the Effective Date, you will
(i) cooperate in all reasonable respects with the Company and its affiliates and
their respective directors, officers, attorneys and experts in connection with
the conduct of any action, proceeding, investigation or litigation involving the
Company or any of its affiliates, including any such action, proceeding,
investigation or litigation in which you are called to testify and (ii) promptly
respond to all reasonable requests by the Company and its affiliates relating to
information concerning actual or prospective customers of the Company which may
be in your possession, provided that the Company will reimburse you for any
reasonable out-of-pocket expenses incurred by you in connection with your
compliance with this Section 9, but only if such expenses have been approved in
writing in advance by the Chief Executive Officer of Communications.
10. Return of Property. On or prior to the Effective Date, you
will surrender to the Company all property of the Company and its affiliates in
your possession and all property made available to you in connection with your
employment by the Company, including, without limitation, any and all records,
manuals, customer lists, notebooks, computers, computer programs and files,
papers, electronically stored information and documents kept or made by you in
connection with your employment.
11. No Public Comment. You, Communications and the Company
agree to refrain from making, directly or indirectly, now or at any time prior
to December 31, 2002, (i) any derogatory comment concerning the other party or
any of such other party's affiliates, current or former directors, officers or
employees or (ii) any other comment that could reasonably be expected to be
detrimental to the business or financial prospects of the other party or any of
such other party's affiliates, to the news or other media, any employees of such
other party or any of its affiliates, or any individual or entity with whom such
other party or any of its affiliates has or may reasonably expect to have a
business relationship. Communications and the Company agree to use reasonable
efforts to cause their respective officers and directors to comply with the
terms of this Section 11, and if, notwithstanding such efforts, any such officer
or director (or officer or director of an affiliate of Communications or the
Company) makes any comment that would constitute a breach of this Section 11 if
such comment was made by Communications or the Company, your covenants under
this Section 11 will not restrict you from reasonably rebutting such comment in
good faith.
12. Breach of Agreement. In the event of any material breach
by you of any provision of Section 8, 9, 10 or 11 of this Agreement or any
provision of Section 8 of the Existing Agreement, which breach, if susceptible
to cure, is not cured by you within 10 days following written notice from the
Company or Communications detailing such breach (it being understood that you
will have such cure right notwithstanding the provisions of Section 5.1.2 of the
Existing Agreement), the Company will cease to have any obligation to make
payments or provide benefits to you under this Agreement or the Existing
Agreement.
<PAGE>
7
13. Release.
(a) General Release. (i) In consideration of the payments and
benefits provided to you under this Agreement, you hereby release and forever
discharge the Company, Communications, each of their respective subsidiaries and
affiliates and each of their respective officers, employees, directors and
agents from any and all claims, actions and causes of action (collectively,
"Claims"), including, without limitation, any Claims arising under any
applicable federal, state, local or foreign law, that you may have, or in the
future may possess, arising out of (x) your employment relationship with and
service as an employee, officer or director of Communications, the Company, or
any of their respective subsidiaries or affiliates, and the termination of such
relationship or service, or (y) any event, condition, circumstance or obligation
that occurred, existed or arose on or prior to the Effective Date; provided,
however, that the release set forth in this Section 13(a)(i) will not apply to
(A) the obligations of Communications and the Company under this Agreement, (B)
subject to the other terms of this Agreement, the obligations of Communications
and the Company under the plans and agreements referred to in Section 14(a) and
the Company's Supplemental Executive Retirement Plan and Retirement Savings
Plan, (C) your rights to continuation coverage under Section 4980B of the
Internal Revenue Code of 1986, as amended, (D) the obligations of Communications
and its subsidiaries to continue to provide director and officer indemnification
in accordance with Section 14(f) and (E) any counterclaim you may have solely as
a direct result of any Claim asserted against you pursuant to clause (B) or (C)
of the proviso to Section 13(a)(ii), which counterclaim may only be brought by
you in good faith and as a defense against any such Claim asserted against you.
You further agree that the payments and benefits described in this Agreement
will be in full satisfaction of any and all claims for payments or benefits,
whether express or implied, that you may have against Communications, the
Company or any of their respective subsidiaries or affiliates arising out of
your employment relationship, your service as an employee, officer or director
of Communications, the Company or any of their respective subsidiaries or
affiliates and the termination thereof.
(ii) Each of the Company, Communications and their respective
subsidiaries and affiliates hereby releases and forever discharges you, your
estate and your legal representatives from any and all Claims, including,
without limitation, any Claims arising under any applicable federal, state,
local or foreign law, that it may have, or in the future may possess, arising
out of (x) your employment relationship with and service, on or prior to the
Effective Date, as an employee, officer or director of Communications, the
Company or any of their respective subsidiaries or affiliates, and the
termination of such relationship or service, or (y) any event, condition,
circumstance or obligation that occurred, existed or arose on or prior to the
Effective Date; provided, however, that the release set forth in this Section
13(a)(ii) will not apply to (A) your obligations under this Agreement, Section 8
of the Existing Agreement, the plans and agreements referred to in Section 14(a)
and the Company's Supplemental Executive Retirement Plan and Retirement Savings
Plan, (B) any act or omission of yours which (i) is in violation of any
applicable civil or criminal law or regulation and (ii) constitutes a felony or
is reasonably expected to result in a liability or liabilities to the Company,
Communications or any of their respective subsidiaries or
<PAGE>
8
affiliates in excess of $20,000 in the aggregate and (C) any materially false or
misleading statement made by you to any customer or supplier of the Company,
Communications or any of their respective subsidiaries or affiliates.
(b) Specific Release of ADEA Claims. In consideration of the
payments and benefits provided to you under this Agreement, you hereby release
and forever discharge the Company, Communications, each of their respective
subsidiaries and affiliates and each of their respective officers, employees,
directors and agents from any and all claims, actions and causes of action that
you may have as of the date you sign this Agreement arising under the Federal
Age Discrimination in Employment Act of 1967, as amended, and the applicable
rules and regulations promulgated thereunder ("ADEA"). By signing this
Agreement, you hereby acknowledge and confirm the following: (i) you were
advised by the Company in connection with your termination to consult with an
attorney of your choice prior to signing this Agreement and to have such
attorney explain to you the terms of this Agreement, including, without
limitation, the terms relating to your release of claims arising under ADEA;
(ii) you have been given a period of not fewer than 21 days to consider the
terms of this Agreement and to consult with an attorney of your choosing with
respect thereto; and (iii) you are providing the release and discharge set forth
in this Section 13(b) only in exchange for consideration in addition to anything
of value to which you are already entitled.
14. Miscellaneous.
(a) Entire Agreement. This Agreement, the Management Equity
Agreement, the Option Plan, the Stock Option Agreements dated as of April 8,
1993, September 1, 1994 and October 1, 1995, respectively, between
Communications and you (collectively, the "Option Agreements"), the
Stockholders' Agreement and Sections 5.1, 7, 8, 9, 10.1, 10.2, 10.3, 10.5 and
10.6 of the Existing Agreement set forth the entire agreement and understanding
of the parties hereto with respect to the matters covered hereby and supersede
and replace any express or implied prior agreement with respect to the terms of
your employment and the termination thereof which you may have had with the
Company or any of its affiliates. This Agreement may be amended only by a
written document signed by the parties hereto.
(b) Governing Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York.
(c) No Mitigation. It is expressly agreed that you will not be
required to mitigate any payments or benefits due to you from the Company or its
affiliates under this Agreement or otherwise by seeking alternative employment,
nor will any payments from, or benefits provided by, the Company or any of its
affiliates be reduced by any amounts or benefits received in connection with any
such alternative employment (except as may be expressly required under the terms
of the applicable benefit plan, arrangement or agreement).
<PAGE>
9
(d) Legal Fees. The Company will reimburse you for any
reasonable legal fees incurred by you in connection with the review and
negotiation of this Agreement, up to a maximum of $10,000 in the aggregate.
(e) Arbitration. Any dispute or controversy arising under this
Agreement that cannot be mutually resolved by the parties hereto will be settled
on the terms set forth in Section 9 of the Existing Agreement.
(f) Indemnification. Following the Effective Date,
Communications and its subsidiaries will continue to indemnify and hold you
harmless (i) with respect to any act or omission committed by you in the
performance of your duties as an officer or director of Communications or its
subsidiaries to and including the Effective Date, on a basis which is no less
favorable to you than was provided by Communications and its subsidiaries
immediately prior to the Effective Date and (ii) with respect to any act or
omission committed by you in the performance of your duties hereunder after the
Effective Date, on a basis which is no less favorable to you than the
indemnification protection generally made available to senior executives of
Communications and its subsidiaries as in effect from time to time.
15. Revocation. This Agreement may be revoked by you within
the 7-day period commencing on the date you sign this Agreement (the "Revocation
Period"). In the event of any such revocation by you, all obligations of the
Company and Communications under this Agreement and will terminate and be of no
further force and effect as of the date
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10
of such revocation. No such revocation by you will be effective unless it is in
writing and signed by you and received by the Company prior to the expiration of
the Revocation Period.
SULLIVAN GRAPHICS, INC.
By__________________________________
Name:
Title:
Accepted and Agreed:
____________________________________
James T. Sullivan
Dated: ____________________
SULLIVAN COMMUNICATIONS, INC.
By___________________________________
Name:
Title:
Dated: ____________________
2nd Amendment
Amendment to Employment Agreement dated as of September 18, 1996
between SULLIVAN GRAPHICS, INC. (the "Company") and STEPHEN M. DYOTT (the
"Executive").
For good and valuable consideration, the Company and the Employee
hereby agree to amend the Employment Agreement as set forth below:
Section 2.1 shall read as follows:
"2.1. General. The Company hereby employs the Executive, and the
Executive agrees to serve, as Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer of the Company, upon the terms and
conditions herein contained. The Executive shall have all of the
responsibilities and powers normally associated with such offices. So long as
the Executive is employed by the Company as its Chief Executive Officer, the
Company shall nominate and use its best efforts to cause the Executive to be
elected as a member of the Board of Directors of the Company (the "Board"). The
Executive shall perform such other duties and services for the Company,
commensurate with the Executive's position, as may be designated from time to
time by the Board. The Executive agrees to serve the Company faithfully and to
the best of his ability under the direction of the Board.
Section 3.1 shall read as follows:
"3.1. Base Salary. From the date of this 2nd Amendment, the Executive
shall be entitled to receive a base salary ("Base Salary") at a rate of $475,000
per annum, payable in arrears in equal installments not less frequently than
bi-weekly in accordance with the Company's payroll practices, with such
increases as may be provided in accordance with the terms hereof. Once
increased, such higher amount shall constitute the Executive's Base Salary."
IN WITNESS WHEREOF, the Company has caused this Amendment to the
Employment Agreement to be duly executed and the Executive has hereunto set his
hand, effective September 18, 1996.
SULLIVAN GRAPHICS, INC.
By: /s/ Timothy M. Davis
______________________________________
Timothy M. Davis
Senior Vice President and Secretary
EXECUTIVE
By: /s/ Stephen M. Dyott
______________________________________
Stephen M. Dyott
October 3, 1996
Mr. Patrick Kellick
Sullivan Graphics, Inc.
100 Winners Circle
Brentwood, TN 37027
Dear Pat:
This will confirm that if Sullivan Graphics, Inc. ("SGI") (i) terminates your
employment without cause, or (ii) in connection with a transaction whereby all
of the stock or substantially all of the assets of SGI are sold, requires you to
relocate more than 50 miles from Brentwood, Tennessee and you voluntarily
terminate your employment, then SGI shall continue to pay your then current base
salary and maintain all your then current benefits (to the extent allowed under
the applicable benefit plans) for a period of two years following your
termination. In such event, SGI shall also pay you a pro rata portion of the
bonus to which you would have been entitled for the year of termination had you
been employed for the entire year, which bonus shall be payable at the time
bonuses under the applicable bonus plan are paid to SGI's executives generally.
Such base salary payments and benefits will be reduced to the extent you receive
compensation and benefits from another employer with respect to such period. The
term "Cause" shall mean the termination of your employment hereunder in the
event of your (i) conviction of any crime or offense involving money or other
property of SGI or any felony, (ii) willful and unreasonable refusal to
substantially perform your duties hereunder, (iii) competition with SGI, or (iv)
gross negligence in the conduct of your duties; provided, however, no
termination shall be deemed for "Cause" under clauses (ii) or (iv) unless you
shall have first received written notice from SGI advising you of the acts or
omissions that constitute the refusal or gross negligence and you fail to
correct the acts or omissions complained of within 20 business days following
receipt of such notice.
For so long as you are employed by SGI, and continuing for two years thereafter,
you shall not, without the prior written consent of SGI, directly or indirectly,
as a sole proprietor, member of a partnership, stockholder or investor, officer
or director of a corporation, or as an employee, associate, consultant or agent
of any person, partnership, corporation or other business organization or entity
other than SGI: (i) render any service to or in any way be affiliated with a
competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of you or the public) to become a competitor) of SGI; (ii)
solicit or endeavor to entice away from SGI any person or entity who is, or,
during the then most recent two-year12-month period, was employed by, or had
served as an agent or key consultant of, SGI; or (iii) solicit or endeavor to
entice away from SGI any person or entity who is, or was within the then most
recent 12-month period, a customer or client (or reasonably anticipated (to the
general knowledge of you or the public) to become a customer or client) of SGI.
<PAGE>
October 3, 1996
Page 2
You covenant and agree with SGI that you will not at any time, except in
performance of your obligations to SGI hereunder or with the prior written
consent of SGI, directly or indirectly, disclose any secret or confidential
information that you may learn or have learned by reason of your association
with SGI. The term "confidential information" includes information not
previously disclosed to the public or to the trade by SGI's management, or
otherwise in the public domain, with respect to SGI's products, facilities,
applications and methods, trade secrets and other intellectual property,
systems, procedures manuals, confidential reports, product price lists, customer
lists, technical information, financial information (including the revenues,
costs or profits associated with any of SGI's products), business plans,
prospects or opportunities, but shall exclude any information which (i) is or
becomes available to the public or is generally known in the industry or
industries in which SGI operates other than as a result of disclosure by you in
violation of your agreements under this paragraph or (ii) you are required to
disclose under any applicable laws, regulations or directives of any government
agency, tribunal or authority having jurisdiction in the matter or under
subpoena or other process of law.
All references to "SGI" include its divisions, subsidiaries and affiliates.
If the foregoing meets with your approval, please sign and return the enclosed
copy of this letter to the undersigned. This agreement constitutes our entire
agreement, supersedes all prior agreements between us, and its provisions may
not be changed or waived, except by a writing signed by the party to be charged
with such change.
Sincerely,
SULLIVAN GRAPHICS, INC.
By: /s/ Stephen M. Dyott
___________________________
Stephen M. Dyott
Chairman, President
& Chief Executive Officer
ACCEPTED AND AGREED TO:
/s/ Patrick Kellick
_______________________________
Patrick Kellick
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SULLIVAN
COMMUNICATIONS, INC.'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SULLIVAN COMMUNICATIONS, INC.
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0
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